Tuesday, September 11, 2012

ETFs: Easy Come, Easy Go

By Tim Husson, PhD

Last month we pointed out a growing number of ETF closures across a variety of issuers.  Hot on their heels, several issuers announced new ETF issuances offering a wide variety of strategies, including many actively managed ETFs, which seem to be all the rage these days.

UBS recently announced (pdf) that it would redeem 12 of its 13 volatility-linked ETNs on September 12.  These twelve funds are actually six pairs of 1x long and 1x inverse notes linked to the performance of VIX futures portfolios with constant weighted average maturities of 1-6 months.  These funds were first issued in September 2011, but did not attract the same level of investor inflows as older products.* Hot on their heels, First Trust has issued a new volatility ETF (VIXH) that combines S&P 500 exposure with a small allocation to VIX options.

Clearly, the ETF marketplace is evolving very quickly.  Issuers seem to be trying out a wide array of different strategies and implementations, and quickly shuttering any products that do not take off.  As we have discussed before, liquidation risk can be significant as investors may not be able to receive the full value of their holdings as of a certain date.  Also, it remains unclear if the more innovative ETFs and ETNs are suitable for all retail investors, since those products are often linked to derivatives positions which would otherwise be unsuitable for many unsophisticated investors.  In any case, it will be interesting to see which products survive in the long run.


* There have been rumors that UBS is planning leveraged versions of these six strategies.

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